MBA 402/53 GUIDE BOOK

1. _____________ can be defined as any business that crosses the national borders of the
country of its establishment.

Ans- International business

2. Exports and imports do not constitute international business. (True/False)

Ans- False

3. ____________ is considered as the first MNC in the world.

Ans-British East India Company

4. Bretton Woods conference led to the formation of _____________.

a) World Trade Organisation
b) International monetary fund
c) United Nations Organisation
d) General Agreement on Trade and Tariffs

Ans- b) International monetary fund

5. Domestic business need to comply with the accounting and taxation standards prevailing in
that country. (True/False)
Ans- True

6. ___________ is not an advantage of international business.

a) Low cost production
b) Market forces
c) Large customer base
d) Diversified risk

Ans- b) Market forces

7. Franchising and licensing are barriers to international business. (True/False)

Ans- False

8. Technological innovations and diminishing trade barriers are _________ of international

business.
Ans- Drivers

9. Companies, which invest in other countries for business and also operate from other
countries, are considered as ___________.

Ans-Global companies

10. International and global business is different. (True/False)

Ans- True

11. Globalisation improves the living standards of people in developing countries. (True/False)

Ans- True

12. ____________ can be defined as ‘the worldwide trend of businesses expanding beyond
their domestic boundaries’.

Ans- Globalisation

13. Trade theories help forecasts and diagnose country trade pattern & trends. (True or False)

Ans-True

14. Opportunity cost and efficiency in production does not vary from country to country. (True or
False)

Ans-False

15. Trade occur as result of:

a. Choice differential.
b. Habit differential.
c. Taste differential.
d. Resource differential.

Ans- Resource differential.

16. Name any two international trade theories?

Ans- Mercantilist and Comparative Cost Theory

17. What are the inherent weaknesses of Mercantilism theory?

Ans-Too much focus on exports only

18. What are the assumptions of Heckscher-Ohlin Theory?

Ans-Factor endowment

19. What is the main assumption of Absolute Cost Advantage Theory?

Ans-Labour is only factor of production

20. The two objectives of National economic policies are ______ and ______.

Ans-Full employment, a high economic growth rate.

21. FDI policy is dictated by the government of the host country. (True/False)

Ans-True.

22. Balance of payment is an indicator of a country’s _______.

Ans-Economic health

23. Political factors define economic and legal environment in a business environment.
(True/False)

Ans-True

24. _______ refers to the absolute power of the state to coerce and control its citizens.
a) Sovereignty
b) National interest
c) Political stability
d) Political risk

Ans-a) Sovereignty

25. The two types of political risks are _______ and _______.

Ans-Macro and micro risk.

26. Three of the most used legal systems are _____, _____ and ______.

Ans-Common law, code law and Islamic law.

27. Scanning of demography provides specific information about different consumer

groups(True/ False)

Ans-

28. Few of the international arbitration bodies are _____, ___, __ and ___.

Ans-International Chamber of Commerce, the American Arbitration Association, the London

Court of Arbitration and the International Centre for the Settlement of Investment Disputes
(ICSID).

29. _______ is defined as the art and other signs or demonstrations of human customs,
civilisation, and the way of life of a specific society or group.

Ans-Culture

30. The consumer tastes and preferences across countries are similar. (True/False)

Ans-False

31. Match the following:

a) PDI 1) tolerance for uncertainty and ambiguity.

b) Individualism 2) pragmatic future oriented perspective.

c) Masculinity 3) equality or inequality between individuals

.
d) UAI 4) individual or collective achievement.

e) LTO 5) support or does not support male dominance

Ans- (a) – 3,

Ans- (b) – 4,

Ans- (c) – 5,

Ans- (d) – 1, (e) – 2

32. The most important cultural components of a country which relate business transactions are
_______, _______, and _______.

Ans-Language, religion, conflicting attitudes

33. The combination of Japanese vagueness and lack of understanding results in problems
which make decision-making very twisted. (True/False)

Ans-True

34. Coded speech and verbosity is considered a waste of time and in time pressured corporate
_______, it is a crime.
a) Brazil.
b) China.
c) USA.
d) France.

Ans-c) USA

35 The ability to demonstrate a series of behaviour is called _______.

Ans-Skill

36. Diverse groups do not require time to solve issues of working together. (True/False)

False

37. In international management, where people are from different cultures, you have to develop
and apply your knowledge about cultures and not use a standard process for everyone. This is
called _______________.

Cross cultural management.

38. Foreign investment is the investment by foreign compay/ individual in Indian

company/industry/sector. (True/False)

Ans-True

39. Foreign Investment is of two types – direct and portfolio investment. (True/False)

Ans-True

40. Identify the correct answer. Which of the following is not result of foreign investment
________________.
a) Improvement in human development skills.
b) Increased competition improved productivity.
c) Grants/donation to Indian companies.
d) Easier integration into global economy.

Ans-C

41. Portfolio Investment is better for a country in the long run. (True/False)

Ans-False

42. India does not allow Green field investment in India? (True/False)

Ans-False

43. Which of the the following is not the route for portfolio investment in a country?
a) Foreign Institutional Investor.
b) Joint Venture.
c) Depository Receipts.
d) Foreign Currency Convertibale Bonds.

Ans-B

44. Regional integration can be defined as the unification of countries. (True/False)

Ans-True

45. Promoting ____________________ is a need of regional integration.

Ans-Economic diversification

46. Identify the correct answer. Regional integration should not ________________.
a) Build environmental programmes at the regional level
b) Strengthen trade integration in the region
c) Contribute to the peace and security of the region
d) Break ties with other countries

Ans-d) Break ties with other countries

47. Countries under a political union do not have a common government. (True/False)

Ans-False
48. Countries under a Common External Tariff on imports from non members are known as
Common Market. (True/ False)

Ans-True

49. The purpose of an economic union is to promote closer __________ and

_____________________ ties.

Ans-Cultural and political

50. Identify the factor of production.

a) Capital.
b) Consumers.
c) Market.
d) Policy maker.

Ans-a) Capital

51. The European Free Trade Association (EFTA) was established in the year:
a) 1950.
b) 1960.
c) 1970.
d) 1980.

Ans-b) 1960

52. ____________ is a trade pact between Argentina, Brazil, Paraguay and Uruguay.

Ans-MERCOSUR

53. The EU comprises of ____________ member states

Ans-27

54. SAFTA agreement was initiated at the 12th SAARC summit held in Bangladesh.(True/False)

False

55. The Gulf Cooperation Council (GCC) is also known as Cooperation Council for the Arab
States of the Gulf (CCASG). (True/False)

Ans-True
56. India and MERCOSUR signed a Framework Agreement on ________.

Ans-17th June 2003

57. The association of India and ASEAN started in the year 1991. (True/False)

Ans-True

58. _____________ is the process of conducting business in multiple countries.

Ans-International business

59. IMF stands for:

a) International Monetary Fund.
b) International Management Foundation.
c) Indian Monetary Fund.
d) Indian Management Foundation.

Ans-a) International Monetary Fund.

60. NAFTA is a major support for international business. (True/False)

Ans-False.

61. The WTO is the successor to the _____________ .

Ans-GATT.

62. Majority of the WTO members belong to developed countries. (True/False)

Ans-False.

63. The main objective of _____________ agreement is to establish framework for liberalising
trade in services.
a) GATT.
b) NAFTA.
c) TRIPS.
d) GATS.

Ans-d) GATS
64. The WTO agreements are a set of rules that are followed by the governments while
formulating policies and practices in the area of international trade. (True/False)

Ans-True.

65. The highest authority of WTO is the _____________.

Ans-Ministerial Conference

66. The _____________ establishes and implements international labour standards.

Ans-International Labour Conference.

67. The Governing Body meets once a year in Geneva and takes decisions on the ILO policies.
(True/False)

Ans-False.

68. The ILO was created in:

a) 1920.
b) 1919.
c) 1929.
d) 1991.

Ans-b) 1919.

69. The body of ILO Conventions and Recommendations is commonly known as the
International Labour Conference. (True/False)

Ans-False.

70. The executive council of the ILO is known as the _____________.

Governing body.

71. International financial management started with ______.

Liberalisation

72. The management of finance in domestic and international business is considerably different.
(True/False)

True
73. The _______ may include any changes that will impact the economic environment of the
country.
a) Foreign exchange
b) Political risks
c) Market imperfection
d) Enhance opportunity set

Ans-Political risks

74. A _______ needs a more complex calculation.

Ans-Forward market

75. The greater part of the world’s deal in foreign currencies is still taking place in the cities
where international financial activity is centered. (True/False)

Ans-True

76. The ________ provides links among the capital markets of individual countries.
a) Foreign currency markets
b) International security markets
c) International capital markets
d) International money markets

Ans-International capital markets

77. The device of finance is the ______ management.

Ans-Working capital

78. The financing decisions made today will have an impact on the future. (True/False)

Ans-True

79. The principle of _______ states that all equally positioned tax payers should contribute in
the cost of operating the government according to the equal rules.
a) Tax equity.
b) Tax neutrality.
c) Avoidance of double taxation.
d) Taxation.

Ans-Tax equity
80. Accounting Standards are the key mandatory and regulatory mechanisms for training on
financial reports and succeeding audit of the same. (True/False)

Ans-True

81. __________ and ___________ are the two indices created based on the differences
between IAS and DAS.

Ans-Absence, divergence

82. GAAP stands for generally accepted accounting principle. (True/False)

Ans-True

83. Information in _______________ is planned for decision makers and who are not involved
in the daily management of the organisation.

Ans-Financial accounting

84. Cost accounting information is planned for _________.

Managers

85. Customer is the most important participant in a business who should be given importance by
the administration. (True/False)

True

86. The European Commission sets directives which are orders to member countries to bring
their laws inline with EU needs within some transition period. (True/False)

True

87. _____________________considers the matters from the perspective of economically

developed countries.

OECD

88. The International Federation of Accountants was founded in the year ______________.

1977

89. Accrual basis is one of the underlying assumptions of _____________.

IFRS

90. Equity is the outstanding concentration on the assets of the enterprise after subtracting all
the liabilities under the historical cost accounting model. (True/ False)

True

91. Which among the following is not an element of financial statements?

a) Asset.
b) Liability.
c) Equity.
d) Accountability.

Ans-Accountability

92. For a firm to be successful internationally, it is not necessary to be successful locally.

(true/false)

Ans-False

93. Culture of a country influences the marketing strategy of the firm. (true/false)

Ans-True

94. _________________ involves a firm, shipping goods directly to a foreign market

Ans-Exporting
.
95. Direct investment involves ________________ in the overseas market.

Ans-Manufacturing

96. A joint venture is an understanding between

a. Two or more firms.
b. Two or more countries.
c. The firm and its subsidiary.
d. two or more parties.

Ans-a) two or more firms

97. Firms that serve global markets cannot be segregated into several clusters based on their
similarities. (True/False)

Ans-False
98. Advertising is a paid form of ______________ communication about an organisation or its
products.

Ans-Non-personal

99. Promotional mix is a blend of advertising, personal selling, sales promotion and
___________.

Ans-Public relations

100. Globalised advertising is associated with the use of the same ______ name across the
world.

Ans-Brand

101. Transfer pricing is considered to be a relatively simple method of moving goods and
services among the overall corporate family. (true/false)

Ans-True

102. __________ is the process of ascertaining the value for the product or service.

Ans-Pricing

103. Brand value builds customer confidence and loyalty. (true/false)

Ans-True

104. International branding is all about differentiating between being global and being local.
(true/false)

Ans-False

105. The task of building a brand is:

A) Complicated.
B) Easy.
C) Critical.
D) Moderate.

Ans-A) Complicated

106. The nature of ________________ plays a vital role in the international business world.
Ans-Strategic management

107. The strategic objectives should be measurable, appropriate, realistic, specific, and timely.
(True/False)

Ans-True.

108. _____________ is a way of attaining a functional service for the company.

Ans-Outsourcing.

109. A _____________ is a simple tool that helps the planning team identify methods to close
the performance gaps that has been identified.

Ans-GAP analysis

110. Top-down planning encourages team work. (True/False)

Ans-False

111. ________________ are responsible for the successful completion of the project.

Ans-Project managers.

112. The __________________ process is a way businesses build strategies that help firms
respond quickly to new challenges.

Ans-Strategic management.

113. The kind of strategy concerned with broad decisions about the total organisation's scope
and direction is _____.
a) Business level strategy
b) Corporate level strategy
c) Functional strategy
d) Competitive strategy

Ans-b) Corporate level strategy.

114. One of the phases of strategic management process which includes decision making with
respect to strategy and organisational structure; develop budgets and motivational systems is
_____.

Ans-Strategy implementation.
115. The three factors governing ethical values are ____________, ___________, and
____________.

Ans-Law, religion, and culture

116. _______________ is the collective experience that people have passed on through the
hunting and gathering phase, agriculture phase, and the industrial phase.

Ans-Civilisation

117. A company can maximise its profits by being ethical. (True/False)

Ans-True

118. ________ is an example of whistle-blowing in corporations.

Ans-Xerox

119. In an international business, _____________ and ____________ are the prominent ethical
issues

Ans-Bribery and corruption and worker compensation

120. ___________ is an important element that differentiates free market and command market.

Ans-Competition

121. Ethical business practice in one country might differ from another country in practice.
(True/False)

Ans-True

122. _________ and ________ are the two models of negotiating.

Ans-Linear and encompassing model

123. _________ is defined as the practice of a uniform system of ethical codes in different
countries that are culturally and socially different.

Ans-Ethical convergence

124. Utilitarian, moral rights, universalism, and cost-benefit are approaches to ____________.
Ans-Ethical decision making

125. A well designed _______ facilitates efficient communication in an organisation.

Ans-Organisational structure.

126. Technology and the environment are factors that influence organisational structure.
(True/false)

Ans-True.

127. ________ is the most complex form of organisational structure.

a) Product division structure
b) Functional structure
c) International matrix structure
d) Foreign subsidiary structure

Ans-c) International matrix structure

128. Planning, recruiting, and termination are some of the functions of the ______________
management.

Ans-Human resource.

129. The expat’s underperformance and failure is not a matter of concern for the multinational
companies. (True/False)

Ans-False. The expat’s underperformance and failure has been a matter of concern for the
multinational companies.

130. HRM activities need to be designed to utilise the employee’s potential to the maximum.
(True/False)

Ans-True

131. Which one of the following is not an important activity involved in HRM?
a. Human resource planning.
b. Recruitment and selection.
c. Remuneration.
d. Project planning.

Ans-d) Project planning.

132. The workforce of a multinational are of three types – parent country nationals, host country
nationals, and _____________.

Ans-Third country.

133. Ethnocentric and polycentric approaches are examples of ____________ policies.

Ans-Staffing.

134. Remuneration is one of the key staffing policies in an international business. (True/False)

Ans-False. Remuneration is not one of the key staffing policies in an international business.

135. The nationality of the employees is not taken in to account while hiring for the company in
geocentric approach. (True/False)

Ans-True.

136. Which of the following is not an approach under staffing policy?

a) Geocentric approach.
b) Biometric approach.
c) Polycentric approach.
d) Ethnocentric approach

Ans-b) Biometric approach.

137. The letter of credit is a letter that is benefial for both buyer and seller. (True/False)

Ans-True

138. The ________ transaction involves the shipping and delivery of goods in advance.
a) Open account.
b) Draft.
c) Cash-in-advance.
d) Letter of credit.

Ans-a. Open account

139. The legal document, given by the shipping company for the merchandises shipped from
one place to another is called as ________.

Ans-Bill of lading

140. The ______________ document is required when you are exporting the goods to other
countries.
Ans-Consular invoice

141. Which of the following document certifies that the goods that are transported are insured
under an open policy?
a) Consular invoice
b) Insurance certificate
c) Commercial invoice
d) Bill of lading

Ans-b. Insurance certificate

142. The _________________is the credit instrument that is developed by the non financial
firm.

Ans-banker’s acceptance

143. The term factoring is the financial transaction in which the business sells its accounts
receivable at a discount. (True/False)

Ans-True

144. In which of the following technique the buyer is known as the forfaiter?
a) Banker’s acceptance.
b) Factoring.
c) Forfaiting.
d) Commercial invoice.

Ans-c. Forfaiting

145. The ________________________ helps in identification of the product and market.

Ans-export promotion scheme

146. The imports of second hand goods that have the minimum residual life of six years are
allowed free of licensee. (True/False)

Ans-False

147. Which of the following scheme aims at import of goods for free of cost?
a) Export Promotion Capital Goods Scheme
b) Software Technology Parks
c) Electronic Hardware Technology Parks
d) Duty exemption scheme

Ans- d. Duty exemption scheme

148. Firms outsource as it enables them for faster turnaround time in their business operations.
(True/ False)

Ans-True.

149. Manufacturing costs vary from country to country. (True/ False)

Ans-True.

150. Low wages and salary are the prime motivators for US companies to outsource to India.
(True/ False)

Ans-True.

151. Which of the following is not a reason for India’s outsourcing attractiveness?
a) Cost Restructuring.
b) Better Capacity Management.
c) Focus on Core Business.
d) Polite People.

Ans-Polite people.

152. IT/ITes outsourcing has brought some ill will/bad publicity towards Indians. (True/False)

Ans-True

153. Outsourcing helps the firm with increased managerial control over all functions.
(True/False)

Ans-False.

154. Global sourcing does not pose any security/confidentiality threat to the country.
(True/False)

Ans-False.
155. Which one of the following is not a concern for India for increasing its stregth as
outsourcing destination?
a) Lack of skilled workforce.
b) Tax breaks.
c) Logistical challenge.
d) Managing retention.

Ans-Tax breaks.

Long question for 5 and 10 Marks

Q1. “The world economy is globalizing at an accelerating pace”. Discuss this statement and list the
benefits of globalization.
(Discuss the statement-6, Listing the benefits-4) 10 marks

The world economy is globalizing at an accelerating pace

The world economy is globalising at an accelerating pace. Countries that were previously closed to
foreign companies have now opened up their markets. Internet has made the world a smaller place. All
these factors have contributed to the growth of international business. International business operates
under different economic, political, and legal environments. There are various theories that are considered
when companies deal with business internationally. When a company deals internationally, it interacts
with people from various cultures across the world. Hence, culture is an important aspect in international
business and a company must handle the cultural diversity in international business. International
business has improved the quality of life of people around the world and has made life simple and easier.
Benefits of globalisation
The merits and demerits of globalization are highly debatable. While globalization creates employment
opportunities in the host countries, it also exploits labor at a very low cost compared to the home country.
Let us consider the benefits and ill-effects of globalization. Some of the benefits of globalization are as
follows:
 Promotes foreign trade and liberalization of economies.
 Increases the living standards of people in several developing countries through capital
investments in developing countries by developed countries.
 Benefits customers as companies outsource to low wage countries. Outsourcing helps the
companies to be competitive by keeping the cost low, with increased productivity.
 Promotes better education and jobs.
 Leads to free flow of information and wide acceptance of foreign products, ideas, ethics, best
practices and culture.
 Provides better quality of products, customer services, and standardized delivery models across
countries.
 Gives better access to finance for corporate and sovereign borrowers.
 Increases business travel, which in turn leads to a flourishing travel and hospitality industry
across the world.
 Increases sales as the availability of cutting edge technologies and production techniques decrease
the cost of production.

Q2. Compare the Adam Smith and David Ricardo’s theories of international trade with examples.
(Adam Smith’s theory-5, David Ricardo’s theory-5) 10 marks
Adam Smith and David Ricardo also argued that trade is ‘positive sum game’ and not a ‘zero sum game’
as mercantilists argued. Trade benefits everyone due to variety of reasons such as cost competitiveness,
comparative advantages, absolute advantages, PLC cycle, factor endowments etc. and mercantilism
theory is by all means considered ‘dead’ or ‘irrelevant’ in contemporary trade environment.

Adam Smith’s theory/ Absolute advantage theory

Adam Smith attacked the mercantilism and argued that countries differ in their ability to produce goods
and services efficiently due to variety of reasons. At that time, England, by virtue of their superior
manufacturing processes, were the world’s most efficient textile manufacturers of the world. This was
due to combination of several factors such as favorable climate, good soils, skilled manpower and
accumulated experience and expertise in textile production. On the other hand, the French had one of the
most efficient wine industries of the world. Thus, England had an absolute advantage in the
manufacturing of textiles and France had an absolute advantage in the production of wine. Adam Smith
argued that a country has an absolute advantage if it has one of the most efficient and cost effective
product in comparison to any other country producing it. Smith argued that countries should specialize in
production and manufacturing of goods and services in which they have an absolute advantage. Such cost
effective and efficient products can be traded with goods from other countries in which that country has
an absolute advantage. According to Smith, England should specialize in the production of textiles and
France should specialize in the production of wine. Countries should exchange such products of absolute
advantage with each other, i.e. England should sell textiles to France and France should sell wine to
England.
The crux of Smith’s absolute advantage theory is that a country should not produce goods at home in
which it does not have cost advantage; instead it should import from other countries. Absolute advantage
theory was based

David Ricardo’s theory/ Comparative advantage theory

David Ricardo, in his notable book ‘Principles of Political Economy’ published in 1817 came up with an
improvement on Adam Smith’s ‘absolute advantage theory’. Ricardo argued what might happen if one
country has an absolute advantage in the production of all goods. Adam Smith’s theory suggests that such
a country might not have benefitted from international trade as trade is positive sum game and countries
prosper only if they exchange the goods in which they have absolute advantage. Ricardo argued that it
was not the case and showed that countries should trade goods with each other where they have
comparative cost advantage. For a sustainable economic system, Ricardo argued that a country should
specialize in the production of those goods that it can produce most efficiently and import the goods
which it produces less efficiently even if it has absolute cost advantage in the production of those goods.

Q3. Regional integration is helping the countries in growing their trade. Discuss this statement.
Describe in brief the various types of regional integrations.
(Regional integration-3, types-7) 10 marks

Regional integration
Regional integration can be defined as the unification of countries into a larger whole. It also reflects a
country’s willingness to share or unify into a larger whole. The level of integration of a country with other
countries is determined by what it shares and how it shares. Regional integration requires some
compromise on the part of participating countries. It should aim to improve the general quality of life for
the citizens of those countries. Regional integration can be achieved with different approaches. To some
extent, each country and region will find its own way. But typically there are some common ideas/reasons
for achieving regional integration.
Some of these are to:
  Facilitate trade growth.
 Achieve conducive climates for investment.
 Surmount the regulatory and administrative barriers to transit zones.
 Ensure safe and reliable trade routes.
Impact of integration
Regional integration results in the creation and diversion of trade. It supports overall growth of the region,
coupled with efficient trading practices. Trade creation increases production and income and also leads to
new entrants in the market and, therefore, results in tougher competition. The transfer of technology is
also faster. Regional integration induces reduction on tariffs and prohibitions. It spreads goodwill among
member countries and also helps in reducing the chances of conflict.

Types of Integration

A whole range of regional integrations exist today. Different types of regional integration are discussed in
this section.
1. Preferential trading agreement
Preferential trading agreement is a trade pact between countries. It is the weakest type of economic
integration and aims to reduce taxes on few products to the countries who sign the pact. The tariffs are not
abolished completely but are lower than the tariffs charged to countries not party to the agreement. India
is in PTA with countries like Afghanistan, Chile and South Common Market (MERCOSUR). The
introduction of PTA has generated an increase in the market size and resulted in the availability and
variety of new products.
2. Free trade area
Free Trade Area (FTA) is a type of trade bloc and can be considered as the second stage of economic
integration. It comprises of all countries that are willing to or agree to reduce preferences, tariffs and
quotas on services and goods traded between them. Countries choose this kind of economic integration if
their economical structures are similar. If countries compete among themselves, they are likely to choose
customs union. The importers must obtain product information from all suppliers within the supply chain
in order to determine the eligibility for a Free Trade Agreement (FTA). After receiving the supplier
documentation, the importer must evaluate the eligibility of the product depending on the rules pertaining
the products. The importers product is qualified individually by the FTA. The product should have a
minimum percentage of local content for it to be qualified.
3. Custom union
Custom Union is an agreement among two or more countries having already entered into a free trade
agreement to further align their external tariff to help remove trade barriers. Custom union agreement
among negotiating countries may encompass to reduce or eliminate customs duty on mutual trade. Under
customs union agreement, countries generally impose a common external -tariff (CTF) on imports from
non-member countries.
4. Common market
Common market is a group formed by countries within a geographical area to promote duty free trade and
free movement of labor and capital among its members. European community is an example of common
market. Common markets levy common external tariff on imports from non-member countries.
A single market is a type of trade bloc, comprising a free trade area with common policies on product
regulation, and freedom of movement of goods, capital, labor and services, which are known as the four
factors of production. This agreement aims at making the movement of four factors of production
between the member countries easier.
5. Economic union
Economic union is a type of trade bloc and is instituted through a trade pact. It comprises of a common
market with a customs union. The countries that are part of an economic union have common policies on
the freedom of movement of four factors of production, common product regulations and a common
external trade policy.
6. Political union
A political union is a type of country, which consists of smaller countries/nations. Here, the individual
nations share a common government and the union is acknowledged internationally as a single political
entity. A political union can also be termed as a legislative union or state union.

Q4. Write short note on:

a) GATS (General Agreement on trade in services)
b) ILO (International Labour organization)
(Meaning and role of GATS-5, Meaning and role ILO-5) 10 marks

a) General Agreement on Trade in Services (GATS) –

It encourages countries to modify their domestic regulations. This modification results in elimination of
restrictions applied to service products entering the country and is applicable to international service
suppliers who are carrying out business in various modes. According to the GATS, MFN status and
transparency is applicable to all services. Other commitments such as national treatment and market
access are only applicable to services that are opened according to the specified negotiated commitments.
GATS covers services known as ‘consumption abroad’ where services such as e-commerce are used by
the consumers in a host country and citizens of a country travel overseas to consume products such as
tourism or education. GATS is a framework agreement defining the rules under which trade in services
must occur. GATS aim at extending the rules covering trade in goods to trade in services. A detailed rule
has been included to take into account the differences between goods and services and the way in which
trade in services is conducted. Trade in services covers a wide range of activities in the area of
telecommunication, information, banking, insurance and education. WTO has recognized over 150
service sub-sectors.

b) International Labor Organisation (ILO)

International Labor Organisation (ILO) is a specialised agency of the United Nations which deals with
labour issues. The headquarters is situated in Geneva, Switzerland. The secretariat comprises of the
people employed by the organisation throughout the world. The secretariat is known as the International
Labour Office. The ILO manages work through three main bodies. They are:
International Labour Conference – The members of the ILO meet at the International Labour
Conference every year in June, in Geneva. Two government delegates along with an employer delegate
and a worker delegate represents their respective member state. The technical advisors also accompany
the delegates.
Governing Body – The executive council of the ILO is known as the Governing Body. It meets thrice a
year in Geneva and takes decisions on the ILO policies. It forms programmes and budgets which are
submitted to the Conference for adoption. The Governing Body has 28 government members, 14
employer members and 14 worker members. Ten government seats are permanently held by states of
chief industrial importance. Taking into consideration the geographical distribution, representatives of
other member countries are elected at the Conference once in every three years. The representatives are
elected by the employers and workers.
International Labour Office – The permanent secretariat of the International Labour Organisation is the
International Labour Office. It is the central point for all activities that are administered by the governing
body. The Office is a center for administration, research and documentation. It employs more than 1,700
officials from 110 nationalities. The Office also organizes certain programmes to extend technical help to
all member nations. Under this programme of technical cooperation, around 600 experts undertake
missions in all regions of the world.
Q5. What is the difference between domestic and international accounting and how will you measure
this difference?
(Differences-35, measures-5) 10 marks

Difference between domestic and international accounting

The management of finance in domestic and international business is considerably different. The four
major aspects which distinguish international management from domestic financial management are the
introduction of foreign exchange, political risks, market imperfection and enhanced opportunity set. They
are explained as follows:
Foreign exchange risks – The foreign exchange risks states the fluctuation or variation in the prices of
currency which will have a tendency to convert a profitable deal to a loss making one. This creates a
situation of additional risk to the finance manager.
Political risks – The political risks may include any changes that will impact the economic environment
of the country. For example, Taxation rules, Contract Act and so on. This pertains to the management of
the country which can alter the rules of the game in an unanticipated manner.
Market imperfection – The integration of countries in the world economy, has resulted in differences in
transportation costs and different tax rates. Inadequate markets can force a finance manager to struggle
for best opportunities across the country’s border.
Enhanced opportunity set – When business is undertaken in a country other than native country, it will
help expand their chances in business. In addition, it will enhance the opportunity for the business and
diversify the goal of international financial management is to increase the wealth of shareholders just like
in domestic financial management. The goals are not only limited to the shareholders, but also to the
suppliers, customers and employees. It is also understood that any goal cannot be achieved without
achieving the welfare of the shareholders. Increasing the price of the share would mean maximizing
shareholders wealth. The management of the organisation must decide the currency in which the value of
the shares is maximized.
The international trade is being promoted and shaped by international institutions called the Bretton
Woods Institutions: International Monetary Fund (IMF), World Bank and World Trade Organisation
(WTO) through its legal initiatives such as the General Agreement of Trade and Tariffs (GATT),
General Agreement on Trade in Services (GATS) and so on. Multi-National Corporations (MNC) have
come into existence due to liberalisation and international agreements. The MNCs enjoy greater freedom
when compared to the normal companies because of international setting and best opportunities. Without
the knowledge in International Financial Management, it can be hard for MNCs let alone any
international business entity, to continue in the market because international financial markets have a
totally diverse shape and analytics in contrast to the domestic financial markets. A sound knowledge in
International Financial Management can assist an organisation to accomplish similar competence and
effectiveness in all markets.

Q6. Discuss the various payment terms in international trade. Which is the safest method and why?
(The modes of payment-8, Safest mode-2) 10 marks

Various payment terms and payment methods in international trade

Since international trade deals with exchange of goods, there are various ways in which the payment
terms (finance) will be handled. Bothe seller and trader should be careful about the method of payment as
They are at different locations and transactions happen without face-to-face interaction. There are four
methods of payment for the international transactions. This includes the Cash-in-advance method, Letter
of Credit, Documentary collections and the Open Account. These are shown in figure.
Figure: Payment Risk Diagram
As shown in figure, there is uncertainty during the time when payment transactions happen between
importer and exporter. The figure compares and contrasts the most suitable methodology from the
perspective of importer and exporter. Apparently the most secure methodologies that work for the
exporter is not safe for the importer. For exporters, documentary collection and open account are less
secure and letter of credit and cash in advance are more secure methods. In the same way, with respect to
the importer, the letter of credit and cash in advance are less secure and the documentary collection and
open account are more secure. These terms are explained as follows.
Cash-in-advance
Cash-in-advance helps in removing the risks of credit by the exporter. By this method, exporter receives
the payment before the transfer of goods. The options that are available with the cash-in-advance method
include wire transfers and credit cards. This is the least attractive method for many of the buyers as it
creates cash flow problems. The buyers are concerned about the quality/quantity and delivery of the
goods that are not sent if the payment is made in advance.
Letters of credit
The letter of credit is the most secure instrument available for international traders. This is the
commitment made by the bank that the payment will be made to the exporter if the terms and conditions
are met. The terms and conditions of the payment are explained in the required documents.
Documentary collections
Documentary collection is a transaction in which, the exporter's bank (remitter bank) sends the documents
to the importer's bank (collecting bank). The document contains information about the payment. The
funds are collected from the importer and paid to the exporter through the banks involved in the
collection, in exchange for the documents.
Open account
The open account transaction involves the shipping and delivery of goods in advance. The payment is due
usually from 30 to 90 days. This is advantageous for the importer in cash flow and cost terms, but at the
same time it is very risky for the exporters. Buyers from abroad stress on open accounts since the
extension of credit from the seller to the buyer are more common in many countries. Exporters who avoid
extending credit may face loss in the sale because of competitors in the market.

Safest mode of payment

Letter of credit
International Trade is affected by distance, laws, political instability and lack of familiarity by the
transacting parties. Letter of credit assumes significance since it can be used to mitigate risk. It is a
document that is issued by the bank that guarantees payment to a beneficiary. It is written by the financial
institution in favor of the importer of goods to the seller. In the letter, the bank promises that it will honor
the drafts drawn on it if the seller confirms to the specific conditions that are set forth in the letter of
credit. The process of letter of credit works as shown under:

Exhibit: Process of Execution for Payment

Qno7“Environment scanning is an important part of international business.” Explain your views on

this statement and discuss what factors need to be scanned.

Discuss the statement

Factors

Answer - Scanning the global business environment is a must for any firm whether doing business
domestically or internationally as the domestic markets are now open to global competition by opening
to foreign players.

There are various factors that affect international business. We can show it in the below Figure

Political Demographic
Enviroment Enviroment

Scanning
global
Socio cultural
enviroment Legal
enviroment Enviroment
 Economic
Enviroment

Economic Environment - The economic environment refers to the economic conditions under which a
business operates and takes into account all factors that have affected it. It includes prime interest
rates, legislation concerning employment of foreigners, return of profits, safety of country, political
stability and so on. Following are the factors that need to be looked out

National economic policies - National economic policies depend on a country’s socio-economic and
cultural background .

All governments aspire to achieve four major economic objectives:

 Full employment.
 A high economic growth rate.
 A low rate of inflation.
 Absence of deficit in the country’s balance of payments.

And the The basic problem is that the first two objectives work against the last two.

Economic structure - International Business managers need to understand and assess international
economic forces at work.

The structure of a nation’s economy is determined by the size and rate of its population
growth, income levels and distribution of income, natural resources, agricultural, manufacturing and
services sector. In economic Structure we need to understand the following points

Industry structure – The structure of an industry is determined by factors such as:

 Market growth.
 Sector wise trends
 Openness of the economy
 International debt
 Balance of payments

The other major grouping is the capital account which shows the balance of transactions in financial
assets, including direct investments in foreign financial instruments, movements in short-term
assets, inter-governmental loans and changes in the country’s gold and forex reserves.

Political Environment - Political factors influence the economic and legal environment in which the
business operates to a larger extent, especially in contract law and rules on advertising and consumer
protection.

Political and economic environments are often inter-related. The political environment affects the
economic environment. For example, a government which is perceived as anti-business by the business
community may lead to capital outflows resulting in the fall of the currency, lower savings and
investment and hence higher interest rates and lower economic growth.In the political environmental
factor we need to analyse the following factors -
  Nature of politics
 Sovereignty
 National interest
 Political stability,
 Political risk

Demographic Environment - In international business; scanning of demographic environment plays an

important role as it helps firm understand the various demographic factors such as gender; age;
religious background and ethnicity. In dempgraghapic Enviroment We need to understand the following
points -

 Segment selection
 Branding and strategy
 Branding and strategy
 Assumption of country culture

Socio-cultural environment - Language, material culture, customs, aesthetics, religious beliefs,

attitudes, values and social organisation has been important for survival and development of societies
globally. Due to these socio-cultural factors, the customers/consumers of a particular country/region
become conditioned to accept certain things as per conditioned behaviour. For example, Coca-Cola has
to sweeten its drinks in India as Indians have an affinity towards sweet taste.Indian meat exporters
export only “HALAL” meat to Arab countries with the inscription “FIT FOR ISLAMIC USE” during packing.

Legal Environment - International businesses confront different sets of laws in various countries of
operation. IB must not only abide by the domestic laws of each nation but also by the supranational laws
which impose obligations beyond those of national legal systems. For example, the European Union.
Major disparities in national law affecting business are:

 Intellectual property protection.

 Consumer protection and product liability.
 Competition among businesses.
 Payment of bribes and other practices.
 Formation and termination of contracts.
 Marketing practices.
 Carriage of goods.

The legal systems of some countries are much better developed than others, particularly the
mechanisms for the administration of justice and the enforcement of court rulings. Most nations
base their legal systems on common law, code law or Islamic law.

QNO 8. What is green field investment? Why is it considered as the best option for a developing
country like India?

Green field investment

Benefits
Answer- Foreign investment has emerged as a potent tool to ensure rapid economic development of the
countries in globalised era as developing countries like India lack the capital domestically. In cases when
an investor invests his capital in the foreign countries/companies in expectation of good returns rather
than putting his money in a local company, it is known as foreign investment. For the country which is
attracting the investment, the investor is known as ‘foreign investor’.

When the FDI comes into new facilities or expansion of existing facilities, it is known as
‘green field investment’. Greenfield investments are most welcome in any country of the world, be it
developed or developing as the primary target of green field investments is to create new production
capacity and jobs, transfer technology and know-how in the host country. Brown field investments, on
the other hand refer to ‘the purchasing of an existing production or business facility that has become
sick or its products do not have significant demand in the markets or its sales are on decline due to
variety of factors like obsolete technology, higher unit cost, poor distribution etc.’ Such a firm is
acquired by companies or government agencies for the purpose of starting new product or service
production activity. This type of investment does not involve construction of plant operation facilities.

Green field investments also establish linkages from the place of production to the
global marketplace. Green field investments are ideal for generating increased employment in the host
country at higher wages, upgrading research facilities and overall process of economic development of
the host country. However, some critics say that efficiencies generated in host country through
Greenfield investments include the loss of market share for competing domestic firms. Greenfield
investments also result in perceived profits and losses to foreign multinationals. Profits generated by
multinationals may be repatriated to home country, thus making the host country’s job immensely
tough by putting a recurring and continuous load of outflow of hard currency from host countries.

QNO9.Regional integration is helping the countries in growing their trade. Discuss this statement.
Describe in brief the various types of regional integrations.

Regional integration

Types

Answer - Regional integration is necessary to improve the relationship between countries and to
promote trade. The overall development of the region is the principal behind regional integration.

Regional integration can be defined as the unification of countries into a larger whole.It
also reflects a country’s willingness to share or unify into a larger whole.
Types - There are different types of regional integration such as free trade area, customs union,
common market, economic union, political union, preferential trading agreement and free trade area.

Free trade area - Free Trade Area (FTA) is a type of trade bloc and can be considered as the second
stage of economic integration. It comprises of all countries that are willing to or agree to reduce
preferences, tariffs and quotas on services and goods traded between them.

Custom union - Custom Union is an agreement among two or more countries having already entered
into a free trade agreement to further align their external tariff to help remove trade barriers. Custom
union agreement among negotiating countries may encompass to reduce or eliminate customs duty on
mutual trade. Under customs union agreement, countries generally impose a common external -tariff
(CTF) on imports from non-member countries.

Common market - Common market is a group formed by countries within a geographical area to
promote duty free trade and free movement of labour and capital among its members. European
community is an example of common market.

A common market is the first step towards a single market. It may be initially limited to a
FTA with moderate free movement of capital and services, but it is not capable of removing the other
trade barriers.

Benefits and costs - A single market has many advantages . A single market presents a challenging
environment for businesses as well as for customers making the existence of monopolies difficult. This
affects inefficient companies and hence, results in a loss of market share and the companies may have
to close down.

Economic union - Economic union is a type of trade bloc and is instituted through a trade pact. It
comprises of a common market with a customs union. The countries that are part of an economic union
have common policies on the freedom of movement of four factors of production, common product
regulations and a common external trade policy. The countries that are part of an economic union have
common policies on the freedom of movement of four factors of production, common product
regulations and a common external trade policy.

These include the free movements of:

 Goods and services within the union along with a common taxing method for imports from non-
member countries.
 Capital within the economic union.
 Persons within the economic union. Some forms of cooperation usually exist while framing fiscal
and monetary policies.

Political union - A political union is a type of country, which consists of smaller countries/nations. Here,
the individual nations share a common government and the union is acknowledged internationally as a
single political entity.
Preferential trading agreement - Preferential trading agreement is a trade pact between countries. It is
the weakest type of economic integration and aims to reduce taxes on few products to the countries
who sign the pact. The tariffs are not abolished completely but are lower than the tariffs charged to
countries not party to the agreement. India is in PTA with countries like Afghanistan, Chile and South
Common Market (MERCOSUR).

Qno10.Write short note on:

a) Foreign subsidiary structure

b) International matrix structure

a) meaning of Foreign subsidiary structure

b) meaning of international matrix structure

Answer -

Meaning of Foreign subsidiary structure

A partially or wholly owned company that is part of a larger corporation with headquarters in another
country. Foreign subsidiary companies are incorporated under the law's of the country it is located.

As one option and increasingly popular option international operations do not have to be
internalised. Instead contractual co operations or joint ventures are viable alternatives for wholly
owned foreign subsidiaries.As a consequence ,foreign subsidiaries are not necessarily wholly owned.

The given diagram in the below can show it.

A global matrix structure is the result of applying two structural dimensions simultaneously at the
highest level of hierarchy.

An example of global matrix structure -

An example , a global area structure and a product area structure could be used at the same time as
like the figure given above but any other combination of areas ,functions ,areas,regions,customers etc is
possible. The main advantage of this structure can be seen to all advantages of the two underlying
dimensions without combining all the caveats. For example ,the M N C can build on both the product
and the regional expertise two different line of authority. Knowlegde transfer is intensive and the
simultaneous considerations of the specific requirement of atleast two dimensions makes decision
process complex but often very balanced between the different needs .This forced considerations of two
aspects of the business should lead to an efficient allocation of resources. conflicts in the organization
which are based on two dimensional lines of authority ,are intended ,but are assumed to enhance the
efficiency.Usually this structure is flexibe and easily adapted to changing external conditions.At the
intersection of two lines of authority,a subsidiary manager has two report two different to two different
supervisor.Often to overcome to this problem a matrix structure is accompanied by decentralisation of
decision of power to lower levels in the hierarchy.

Qno11. Explain the Top-down and Bottom-up approach of planning.

Top- down

Bottom-up

Answer – Top- down

Top-down planning is a common strategy that is used for project planning. . It helps maintain the
decision making process at the senior level. Senior-level managers have to be very specific when laying
out expectations because the people following the plan are not involved in the planning process. It is
very important to keep the morale of the employees high and motivate them to perform the job.Since
employees are not included in any of the decision making processes, they are motivated only through
fear or incentives.

Management must choose techniques to align projects and goals with top- down planning.
Management alone is held responsible for the plans set and the end result. The benefit of talented
employees with prior experience on definite aspects of the project are not utilised based on the
assumption that the management can plan and perform a project better without the inputs from these
employees.

 Top-down planning Top-down planning helps:

 Determine all the goals at the initial stage of the process.
 Identify the lack of ground level staff participation.
 Estimate the inflexibility.
 Find how management imposes the processes.
 Determine the lack of motivation.
 Find whether the staffs feel that their input is valued or not.
Bottom-up planning – It is commonly referred to as tactics. With bottom-up planning, an organisation
gives its project deeper focus because each organisation has a huge number of employees involved, and
each employee is an expert in their own area. Team members work side-by-side and contribute during
each stage of the process. Plans are developed at the lowest levels, and then passed on to each of the
subsequent higher levels. Finally, it then reaches the senior management for approval.

Lower-level employees take personal interest in a plan that they are involved in
planning. Employees are more encouraged which in turn improves their morale. Project managers are
responsible for the successful completion of the project.

Bottom-up planning

Bottom - up planning helps:

 As there are no long term vision here.

 Encourage teamwork.
 Estimate flexibility.
 Determine whether team motivation is of high level.
 Identify whether the project is team driven.
 Find whether the staff feels valued or not.

Conclusion - These two project management methods is most effective.

12 Discuss the importance of ethics in international business.

Importance of ethics

Answer - Most countries have similar ethical values, but are practiced differently. With the rise in global
firms, issues related to ethical values and traditions become more common. These ethical issues create
complications to Multi-National Companies (MNCs) while dealing with other countries for business.
Hence, many companies have formulated well-designed codes of conduct to help their employees.

Two of the most prominent issues that managers in MNCs operating in foreign countries face are bribery
and corruption and worker compensation.

Bribery and corruption – Bribery can be defined as the act of offering, accepting, or soliciting something
of value for the purpose of influencing the action of officials in the discharge of their duties. Corruption
is the abuse of public office for personal gain. The issue arises when there are differences in perception
in different countries. For example, in the Middle East, it is perfectly acceptable to gift an official,
whereas in Britain it is considered as an attempt to bribe the official, and hence, considered unlawful.

Worker compensation – Businesses invest in production facilities abroad because of the availability of
low-cost labour, which enables them to offer goods and services at a lower price than their competitors.
The issue arises when workers are exploited and are underpaid compared to the workers in the parent
country who are paid more for the same job. The disparity arises due to the differences in the regulatory
standards in the two countries.

Financial crisis of 2007-2008 underlined importance of ethical behavior. It is no

longer enough to be knowledgeable and experienced in a particular domain, in order to act
professionally. Professionalism also consists in ethical behavior, honesty, compliance and integrity. How
to ensure such a working style at all times in long-term and why it is necessary to do so? 

I suggest the following approach to international business ethics:

Every individual and every corporate body must outline its ethical values;

• Every individual and company should ensure understanding of ethical values and belief in their
effectiveness and importance;

• Employees of every organization must participate in creating a corporate code of conduct, which
in this case definitely represents corporate culture, rather than only personal views of a company’s
leader;

• Every individual and company must monitor compliance with the outlined values at all times;

• All the ethical values must be divided in two categories – rigid and flexible. Rigid are those
values which cannot be renounced under any circumstances (honesty, integrity, professionalism), and
flexible ones, which are those moral principles which may be interpreted in different ways in different
situations (will to understand other cultures’ values, remuneration policies).

In such a way, when foreign bodies with different ethical codes of conduct meet, they are able to create
an effective common ethical cooperation framework, keeping rigid values unchanged and adapting
flexible moral principles. Such an approach is able to ensure every involved party’s accordance and
satisfaction with the created ethical cooperation framework for that particular project without violating
personal convictions.

I strongly believe that it is one of the most effective ways of ensuring ethical behavior in international
business, which is effective at individual, corporate, state and supranational levels.

Qno 13.
 Discuss Porter’s diamond model for international trade.

A Explain the model with diagram

Answer - Answer-1

Porter’s diamond model

, Michael Porter analyzed the reason behind some nations’ success and others’ failure in international
competition in 1990. His thesis outlined four broad attributes that shape the environment in which local
firms compete and these attributes promote the creation of competitive advantage. They are explained as
follows:
Factor endowments – Characteristics of production were analyzed in detail. There are basic factors like
natural resources, climate, and location and so on and advanced factors like communications
infrastructure, research facilities.
Demand conditions – The role of home demand in improving competitive advantage is emphasised since
firms are most sensitive about the needs of their closest customers. For example, the Japanese camera
industry which caters to a sophisticated and knowledgeable local market.
Relating and supporting industries – The presence of suppliers or related industries is advantageous
since the benefits of investment in advanced factors of production spill over to these supporting
industries. Successful industries within a country tend to be grouped into clusters of related industries. For
example Silicon Valley.
Firm strategy, structure and rivalry – Domestic rivalry creates pressure to innovate, improve quality,
and reduce costs which in turn helps create world-class competitors. He said that these four attributes
constituted the diamond and he argued that firms are most likely to succeed in industries where the
diamond is most favorable. He also stated that the diamond is a mutually reinforcing system and the
effect of one attribute depends on the state of others. For example, favourable demand conditions will not
result in a competitive advantage unless the state of rivalry is enough to elicit a response from the firms.

Qno14. Evaluate the importance of political stability for conducting international

business. What is political risk?

Answer - Answer-2

Political stability
Political instability may arise from revolution and insurgency, involvement in foreign wars, changes in
government, bad international relations, falling national income, high inflation and rising foreign debt,
resulting in the physical destruction of a firm’s assets, higher taxes, import controls and barriers on
money leaving the country.
Political risk

It may emerge from social unrest due to unevenly distributed income, competing political ideologies or
ethnic groups within a nation, rise or fall of individual leaders or from international relations. In the
modern
world, a country’s economic prospects depend heavily on foreign investment and goodwill of the business
community.
There are two types of political risks, namely macro and micro risks as explained below:
 Macro risk affects all foreign firms operating in the country equally and may include the
imposition of exchange controls, special taxes, local content rules and so on.
 Micro risk applies to a particular company industry or project. For example, import restrictions
on specific products, compulsory breaking up of a firm into smaller parts, cancellation of
contracts and so on.

Qno15.
Discuss the role of WTO in international trade. Explain any 2 major agreements in

WTO.

Answer - Principles
The WTO principles of the trading system are:
Trading without discrimination – One aspect of indiscrimination is that foreigners and natives must be
treated equally. This implies that imported goods that are in the market must not face discrimination.
There is also a Most Favored Nation (MFN) principle which requires the nations to treat all WTO
members equally. If one nation grants a special trade deal to another nation, the deal must be extended to
all WTO members.
Trade barriers negotiated downwards – Trade barriers such as import tariffs, red tape should be
lowered and trade growth must be encouraged.
Predictable trading – The predictability in business helps to know the real costs. The WTO operates with
tariff bindings and agreements that restricts raising a specific tariff over a given time. This provides the
business with realistic data. The business can also anticipate a stable future if the trade rules are made
clear and accessible.
Competitive trading – The WTO works towards trade liberalization and understands that trade
relationships between nations can be very complex. The WTO agreements support healthy competition in
services and intellectual property and discourage subsidies and dumping of products at prices below the
cost of their manufacturer.
Encourage development and economic reforms – The majority of the WTO members are developing
economies that are changing to market economies. The developed nations must give market access to
goods from the under developed countries and provide technical assistance. Developed countries are
allowing duty-free and quota-free imports for all the products from the under developed countries.

Agreements

The WTO agreements are a set of rules that are followed by the member governments while formulating
policies and practices in the area of international trade. The agreements mainly cover goods, services
and intellectual property. The agreements comprise of the rights and obligations of the government that
are enforceable in multilateral framework. The
agreement supports individual countries’ commitments to lower customs tariffs and other trade barriers,
and to open services markets. The agreements also recommend governments to make their trade policies
transparent. According to the agreement, the government must notify the WTO about the measures
adopted to make their trade policies transparent.

General Agreement on Trade in Services (GATS) – GATS is a framework agreement defining the rules
under which trade in services must occur. GATS aims at extending the rules covering trade in goods to
trade in services. A detailed rule has been included to take into account the differences between goods
and services and the way in which trade in services is conducted. Trade in services cover a wide range of
activities in the area of telecommunication, information, banking, insurance and education. WTO has
recognized over 150 service sub-sectors.
The main objective of GATS is to establish a framework for liberalizing trade in services. It encourages
countries to modify their domestic regulations. This modification results in elimination of restrictions
applied to service products entering the country and is applicable to international service suppliers who
are carrying out business in various modes.
According to the GATS, MFN status and transparency is applicable to all services. Other commitments
such as national treatment and market access are only applicable to services that are opened according
to the specified negotiated commitments. GATS covers services known as ‘consumption abroad’ where
services such as e-commerce are used by the consumers in a host country and citizens of a country travel
overseas to consume products such as tourism or education.

Trade-Related Aspects of Intellectual Property Rights (TRIPS) – The Agreement on Trade-Related

Aspects of Intellectual Property Rights (TRIPS) is one of the WTO agreements that is compiled by all
WTO members. According to TRIPS, developed and developing members of WTO must adopt the same
minimum levels of intellectual property protection. The TRIPS Agreement includes rules on domestic
enforcement procedures. TRIPS Agreement focuses on issues such as innovation and the dissemination of
technology, development of , health care and the operation of multilateral environment agreements.

The TRIPS agreement states that members can take actions to protect the public health and nutrition. It
encourages protection of new plant varieties. The members are encouraged to develop national systems
that promote local breeding, rights of farmers and protect human fundamental human rights which
include the right to food and health. It promotes the use and protection of knowledge that is relevant to
the conservation and use of biological diversity. This includes knowledge in technology and genetic
material. The 1995 WTO TRIPS Agreements covers copyright and related rights, geographic indications,
trademarks, and patents of integrated circuits, protection of information and control of
anticompetitive practices in contractual licenses.

16 Write short note on:

a) Strategic planning

b) Ethical convergence

Answer - A)

Strategic Planning
We had discussed about strategic management in the previous section. In this section we will learn about
the key components of strategic management that is strategic planning and its types. Strategic planning
involves the structured efforts of an organization to effectively recognize its purposes for existing, the
direction that the organization will pursue, and how that direction will allow the entity to achieve its
short-term and long-term goals. Strategic planning is an important element in all kinds of organizations
and is applied by governments, non-profit agencies, individuals and businesses.
A simple approach to strategic planning is as discussed below:
1. The first step is to accurately assess where the entity is today, with respect to its ability and resources.
2. The second step is to recognize where the organization would like to reach at some specific point of
time in the future, by efficiently setting goals and objectives that it needs to accomplish.
3. The third and final step engages choosing how to successfully progress from the conditions of today
and methodically work toward those goals in a structured and logical manner.
During the strategic planning process, experts employ many ways, and sometimes break down each
process into a series of steps. The complexity of the exact approach used frequently comprises of the
nature of the organisation, the kind of goals laid down and the resources needed to attain those goals.

B) Ethical convergence
Ethical convergence is defined as the practice of a uniform system of ethical codes in different countries
that are culturally and socially different. There is a growing pressure on international business to follow
a uniform set of guidelines in managing ethical behavior and social responsibility across the countries in
which they operate. Some of the advantages of ethical convergence are:
 The growth of international trading blocks, such as North American Free Trade Agreement
(NAFTA) and the European Union promotes common ethical practices across national cultures
and borders to reduce institutional differences. Predictable interaction and behavior among
trading partners from different countries makes trade more efficient.
 People from different cultural backgrounds increase their interactions and exposure to varying
ethical traditions. They adopt, adjust to, and imitate new behavior and attitudes which leads to
acceptance of best practices.
 International businesses have employees from different cultural backgrounds. The companies
rely on their corporate culture to provide consistent norms and values that govern ethical issues
to set common standards for employees from different cultural backgrounds.

Qno 17.
Explain in various modes of payment in international trade. Discuss the role of

letter of credit in the same.

Answer - For successfully conducting international trade in today’s competitive international

environment, it is essential for the exporters to offer attractive sales terms and payments to importers so
as to woo them for business. One of the major concerns for en exporter is to choose the appropriate
payment method in order to minimize risks related to payments of trade transaction. Payment should be
done after understanding the economic scenario of importer’s country, importer credit worthiness and to
certain extent accommodating the needs of the importer. Exporter can choose any mode of payment
depending on risk perception, size of deal, importer credit worthiness and economic situation in
importer’s country. Usually sale in domestic market are on open account and in certain cases it can be
on cash in advance. Such methods also depend on buyer’s and seller’s power to negotiate and nature of
competition such as:

 Monopoly condition will favour to the seller.

 Perfect competition will favour to the buyers.

However, in case of international trade, exporter has to take more precautions as some methods of
payment are unique and usually used in case of international trade only. Key consideration while
deciding upon a payment term in foreign trade is elaborated as under. A. Some of the major risks
involved in realization of payments in international trade can be either at importer, importer bank and
importer’s country such as insolvency and default by importer, insolvency of importer bank and exchange
control restrictions, inconvertibility issues with importer’s country.

B. Some of the risks involved in international trade in Liberalization, Privatization and Globalization era
can be under control of exporter but some cannot be. For example, credit risk which arises from a
change in the credit worthiness of importer can be covered by ECGC.
Exhibit: Choice of payments method: Decision Matrix
1. Buyer-Seller relationship.
2. Competition.
3. Buyer’s credit standing.
4. Uniqueness of the product (Is it custom made?)
5. Cash flow considerations.
6. Country conditions (political, economic).
7. Transaction costs.
8. Risk tolerance/aversion.
9. Other.
Source: Craig F. Schaffer, Inside Trade Finance
C. International Trade Operations offers different types, quantum and location of risks, thereby confusing
the exporter with uncertainty over realization of payments and timing of payments between the exporter
and importer.

D. For exporters, any international sale will be equivalent to gift until he has not realized the payment
from the importer. For importer any payment is donation until he has received the cargo as sent by
exporter.

E. Exporter will always be interested to receive the payments as soon as he/she sends the goods to
importer through shipment. Importer will be willing to delay the payments as he/she will be interested to
sell these goods in markets and then make the payments to exporter. F.

G. Though safe mode of payment such as L/C is getting popular, this is not usually used by small
exporters and importers due to heavy transaction costs. For example, L/C is used as mode of payment
only in 14% trade transactions due to heavy transactions costs.

H. Exporter can alternatively divide the payment category into secure mode and unsecure mode. The
secure mode of payment for exporter is cash in advance and letter of credit. Unsecure mode of payment
are Open Account, Documents against Acceptance and Documents against Payments.
Letters of credit
The letter of credit is the most secure instrument available for international traders. This is the
commitment made by the bank that the payment will be made to the exporter if the terms and conditions
are met. The terms and conditions of the payment are explained in the required documents.

Letter of credit
International Trade is affected by distance, laws, political instability and lack of familiarity by the
transacting parties. Letter of credit assumes significance since it can be used to mitigate risk. It is a
document that is issued by the bank that guarantees payment to a beneficiary. It is written by the
financial institution in favour of the importer of goods to the seller. In the letter, the bank promises that it
will honour the drafts drawn on it if the seller confirms to the specific conditions that are set forth in the
letter of credit. The process of letter of credit works as shown under:

Qno 18. Explain the various modes of entry in international business which could be used a part of
strategy to enter foreign market.

Answer - Mode of entering into potential markets

Having scanned the best potential international markets which meet the corporate competitiveness
criteria of the firm, it has to evaluate the most profitable way of market entry so as to sell its products and
services to potential customers in these markets. There are several methods used in globalised era for
international market entry, such as exporting, franchising, licensing, joint venture and wholly owned
subsidiary. The entry method suitable to firm requirement shall depend on a variety of factors, such as
the nature of firm product or service, the conditions for market penetration, entry and exit barriers and
financial commitment required for getting into international markets.
Exporting, which is widely used for the first time traders is accomplished by selling the products or
services directly to a foreign firm or customer. Alternatively, firm can export through an export
intermediary, such as a commissioned agent, an export management company or a trading company.
International joint ventures are very effective means of entry into
potential markets as it provides the firm to share domestic knowledge with the aligned firm and can use
partner strengths effectively and hedge its risks. Joint ventures are good means for market entry in those
markets where there are entry barriers like capital limit requirement.

1. Exporting
Of the various methods of foreign market entry, exporting is most commonly used by small and first time
businesses as exporting involves limited startup costs and risks and profit under this method can be
realized as early as
firm gets started. The most advantageous aspect of market entry through exporting is that it involves
minimal preliminary expenditures except some which incur on market research and product promotion.
Getting through export into international market can be by two basic ways, namely:
a. Direct export.
b. Indirect export.
The direct exporting requires the firm/company to find a potential foreign buyer and then the firm is
supposed to make all necessary arrangements for transporting the products into destined market. The
firms which cannot locate the direct buyers for the product can export indirectly by using an export
intermediary. Several types of export intermediaries whom the firm can use are as follows.
a. commissioned agents.
b. export management companies (EMCS).
c. export trading companies (ETCS).
d. foreign trading companies.
e. export merchants/export agents/buying houses.
f. piggyback exporting.
2. Licensing
Licensing is also an easy, risk free and costless method to enter into international markets. Licensing
operate in a way that it permits another company in the target country to use its property as a licensee
and in exchange, pays a fee or royalty on sales so incurred. The property of licensor is intangible, such
as trademarks, patents, copy rights, technical know-how and production techniques. The licensee has to
pay the fee in exchange for the rights to use the intangible property as granted by the licensor. Licensing
is very preferred way of market entry into international market in globalised era as it requires little
investment on the part of the licensor. Licensing, if effectively used as an entry mode, has the potential to
provide good return to the licensor, but usually it has been seen that licensee who produces and markets
the product takes away returns from manufacturing and marketing activities due to vague regulatory law
in developing countries.
3. Joint ventures
Joint ventures are market entry options whereby firm and another company or firm in target market may
join together to form a new incorporated company for business operations in that market. In joint
ventures, both the parties are supposed to provide capital and resources in the agreed proportion and
accordingly they will represent and share profits and loses. Such mode of entry is popular in countries
where there are restrictions on foreign ownership. For example Venezuela, China, Vietnam. Joint venture
is also a preferred way of market entry as it is good tradeoff between potential risks and returns and
usually joint ventures is manifested with the following common objectives for market entry in globalised
era.
They are:
a. Market entry into potential market.
b. Risk/reward sharing between parties.
c. Technology sharing between parties.
d. Joint product development between parties.
e. Conforming to government regulations.
f. Possible advantages from political connections.
Qno19.Define international Business. What are the various factors affecting international Business?

 Definition international Business

 Various factors affecting international Business

Answer –

Answer: - International business can be defined as any business that crosses the national borders of a
country. It includes importing and exporting; international movement of goods, services, employees,
technology, licensing, and franchising of intellectual property (trademarks, patents, copyright and so
on). International business includes investment in financial and immovable assets in foreign countries.

Various factors affecting international Business:-

There are various factors that affect international business. These factors include economic
environment, culture, political environment, financial and banking systems, regulatory bodies, human
capital, and trade policies and so on, of the target country. Figure represents the various factors
affecting international business.

Figure: Factors affecting international business

In a rapidly changing global economic scenario under World Trade Organization, starting an
international business is considered to be more complex than starting a domestic business. There are
two specific reasons for it. Firstly, the numbers of parties involved in international trade are more than
domestic business. Such parties may include customs officials, Director General of Foreign Trade,
Reserve Bank of India, excise officials and duty drawback officials, insurance companies, shipping
companies, freight forwarders, and banks except exporter and importer himself.
QNO20. Explain detail structure of WTO with diagram. Structure of WTO with Diagram.

Answer: - The structure of the WTO consists of the Ministerial Conference, which is the highest
authority. This body consists of the representatives from all WTO members. The members meet once in
every two years and decisions on all matters regarding the multilateral trade agreements are taken.
Subsidiary bodies and the General Council composing of WTO members undertake the daily activities of
the WTO. The members report to the Ministerial Conference. On behalf of the Ministerial Conference
the General Council administers as the Dispute Settlement Body to handle the dispute settlement
procedures. It also acts as the Trade Policy Review Body that regularly reviews the trade policies of
individual WTO members.

The General Council delegates responsibility to other major bodies. They are:

i. Council for Trade in Goods – It manages the implementation and functioning of all agreements
covering trade in goods

ii. Trade in Services and Trade of Intellectual Property Rights – These two councils are responsible for
their respective WTO agreements. They can also establish their own subsidiary bodies, if required.

iii. Committee on Trade and Development – It handles issues related to the developing countries.

iv. The Committee on Balance of Payments – Consultations between WTO members and countries that
take trade-restrictive measures to handle balance-of-payments difficulties.

v. Committee on Budget and Administration – Issues concerning financing and budget of WTO are
handled by them.
QNO21. Write a short note on international regulatory bodies.

European Union

United nations

OECD

IASC

IFA

Answer:-

i. European Union: - European Union is pro-active in the harmonisation process. European Commission
sets directives, which are orders to the member countries, to bring their laws inline with EU needs,
within some transition period. The earlier accounting directives are:

a. The nature and design of financial statements.

 b. The measurement support on which the financial statements are to be organised.
c. The significance of consolidated financial statements.
d. The need that auditors should ensure that the financial statements reflect a true perspective of the
organisation’s operations.

ii. United Nations: - The United Nations is interested in international accounting since the early 1970s
and has been operating under a 'Group of Eminent Persons'. This further led to the establishment of
Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting
(ISAR) by the UN Economic and Social Council.

The ISAR attempts to support the developing countries, by creating recommendations on the
accessibility and comparability of information disclosed by international businesses.

iii. Organisation for Economic Cooperation and Development (OECD):- The OECD was established by
world's 24 developed countries, of which some are Australia, Austria, Belgium, and Canada. This was set
up for promoting world trade and international economic growth. This looks at matters from the
perspective of economically developed countries. The council of OECD has established a committee on
International Investment and Multinational Enterprises (MNEs). This committee in turn has established a
Working Group on Accounting Standards. The ‘Working Group’ has recently published a 'Clarification of
the OECD Guidelines', and published reports as an element of an 'Accounting Standards Harmonisation'
series.

iv. International Accounting Standards Committee (IASC):- International Accounting Standards

Committee was created in the year 1973. It has issued a series of standards to harmonise management
of accounting issues globally. The chief objective of IASC is the encouragement of comparability of
financial statements between countries, by establishing standards for inventory assessment,
depreciation, delayed income taxes, and so on.

v. The International Federation of Accountants (IFA):- The International Federation of Accountants was
founded in the year 1977. It completely supports the work of the IASC, and recognises the IASC as
having responsibility and authority to issue rules on international accounting standards. IFA has parallel
responsibility of IASC’s objective of developing international guidelines for auditing, ethics, education
and management accounting.

Some of the other international regulatory bodies are:

a. Governmental Accounting Standards Board.

b. Independence Standards Board.
c. International Accounting Standards Board.
d. International Organisation for Securities Commission.
e. National Association of State Boards of Accountancy.
f. Public Company Accounting Oversight Board.
g. UK Accounting Standards Board.
Qno22.What are the four methods of payment for the international Transactions? Payment Methods
10

Answer –

Four methods of payment for the international Transactions:-

i.Cash-in-advance: - Cash-in-advance helps in removing the risks of credit by the exporter. By this
method, exporter receives the payment before the transfer of goods. The options that are available
with the cash-in-advance method include wire transfers and credit cards. This is the least attractive
method for many of the buyers as it creates cash flow problems. The buyers are concerned about the
quality/quantity and delivery of the goods that are not sent if the payment is made in advance.

ii.Letters of credit: - The letter of credit is the most secure instrument available for international
traders. This is the commitment made by the bank that the payment will be made to the exporter if
the terms and conditions are met. The terms and conditions of the payment are explained in the
required documents.

iii.Documentary collections: - Documentary collection is a transaction in which, the exporter's bank

(remitter bank) sends the documents to the importer's bank (collecting bank). The document
contains information about the payment. The funds are collected from the importer and paid to the
exporter through the banks involved in the collection, in exchange for the documents.

iv.Open account: - The open account transaction involves the shipping and delivery of goods in
advance. The payment is due usually from 30 to 90 days. This is advantageous for the importer in
cash flow and cost terms, but at the same time it is very risky for the exporters. Buyers from abroad
stress on open accounts since the extension of credit from the seller to the buyer are more common
in many countries. Exporters who avoid extending credit may face loss in the sale because of
competitors in the market.
 Figure: Payment Risk Diagram

Q.23. Explain in detail about short term credit and long term credit.

Short term credit 5

Long term credit 5

Answer:-

Short term credit:-

The short term credit is provided in the form of pre-shipment and post shipment finance. This can be
provided by the commercial banks that are authorised dealers in the foreign exchange. Short term
credits are covered by RBI and provide credits at lower rate of interest. In relation to this type of credit,
there are two schemes that are explained as follows:

a. The Pre-shipment Credit in Foreign Currency (PCFC) in which the exporters can take the credit both
in rupees as well as, the foreign currency. We get the credit in Indian rupees at base rate+1% of
interest and the foreign exchange at London interbank offered rate (LIBOR)+1% rate of interest.
Concessional pre-shipment credit as per RBI rules can be for 6 months.

b. The second scheme is the post-shipment credit that is available in Indian rupees. This post-shipment
credit rate of interest is available in Indian currency which does not exceed 13% for a maximum of
180 days. Higher rate of interest are charged when post-shipment finance is availed for more than 6
months.

Long term credit:-

Long term credit is provided by the EXIM bank and the commercial banks that are refinanced by the
IDBI.

The important aspect of export credit is the risk of transacting with the overseas buyers. The risks with
the foreign buyers occur due to the insolvency of the buyers when there are fluctuations in exchange
rates and some government actions that cause delay in the payment to exporters. These types of risks
can be averted by the insured Export Credit and Guarantee Corporation (ECGC). This corporation offers
two types of services that are given as below:

a. The export credit insurance, which consists of the policies that are issued to the exporters to
protect themselves against the losses that occur from granting credit terms to the foreign buyers.

b. The direct guarantees are the guarantees to the banks that give protection in respect of exporters.
Q24.What are the various advantages of global sourcing?

Advantages of Global sourcing

Answer:-

Advantages of Global sourcing:-

i.Benefits of core competency: - A large company offering products and services in many segments
and industries need to constantly focus on delivering innovative products. Larger business
organisation sometimes develop stagnancy due to their back office operations which may affect its
core function or activities. Therefore, such companies usually outsource their non core activities to
other companies.

ii.Effective and efficient business operations: - Back office operations for any firm in today’s’
competitive environment are not only complicated in nature but also expensive in terms of both
financial resources and time. Organisations can focus on core strength when such non allied activities
are outsourced at consistent and reasonable cost. Outsourcing such operations can help firms tide
over such problems areas.

iii.Reduced overhead expenses: - Firms have to outsource some of their functions to cost effective
destinations as overhead costs of performing a particular back office function may be extremely high
in its own country due to different factor endowments.

iv.Better control on operations: - Any business operations for which costs are running out of control is
better outsourced. Sometimes, there are certain departments that may have evolved over time into
uncontrolled and poorly managed areas. This becomes a prime motivator for outsourcing.
Outsourcing such departments to another country/region helps the firm learn/imbibe better
management skills, innovation and practices.

v.Manpower staffing flexibility: - Outsourcing seasonal/cyclical business operations also help firms
save costs. There are seasonal or cyclical demands of goods and services requiring additional
manpower resources from firms. Firms can outsource such operations to another region/country
where labour expenses may be just a fraction of what it is in the domestic market.

vi.Sustainable business operations and reduced risks: - Due to uncertain business scenarios and the
changing demographic profile of countries, there have been trends and periods of high employee
turnover which add uncertainty and inconsistency to a firm’s business operations. More so, it has
been observed that sometimes a region of the world may go into turmoil, civil disorder, God or
manmade catastropheies, etc. If a firm’s business operations are outsourced to different parts of the
world, it can survive from such risks and can ensure sustainable business operations.